The Chicago Lock Company ("the Company"), a manufacturer of "tubular" locks,
brought suit against Morris and Victor Fanberg, locksmiths and publishers
of specialized trade books, to enjoin the unauthorized dissemination of
key codes for the Company's "Ace" line of tubular locks. The District
Court granted summary judgment in favor of the Fanbergs as to the Company's
[*402] federal claims of trademark infringement and unfair competition,
but held trial on the common law claim of unfair competition under former
Cal.Civ.Code § 3369.(1) The court concluded that
the key codes for the Company's tubular locks were improperly acquired trade
secrets and enjoined distribution of the Fanbergs' compilation of those
codes. For the reasons set forth in this opinion, we reverse the District
Court and order that judgment be entered in favor of the Fanbergs.

THE FACTS

Since 1933 the Chicago Lock Company, a manufacturer of various types of
locks, has sold a tubular lock, marketed under the registered trademark
"Ace," which provides greater security than other lock designs. Tubular
Ace locks, millions of which have been sold, are frequently used on vending
and bill changing machines and in other maximum security uses, such as burglar
alarms. The distinctive feature of Ace locks (and the feature that
apparently makes the locks attractive to institutional and large-scale commercial
purchasers) is the secrecy and difficulty of reproduction associated with
their keys.

The District Court found that the Company has a fixed policy that it will
only sell a duplicate key for the registered series Ace lock to the owner
of record of the lock and on request of a bona fide purchase order, letterhead
or some other identifying means of the actual recorded lock owner. In
addition, the serial number-key code correlations are maintained by the
Company indefinitely and in secrecy, the Company does not sell tubular key
"blanks" to locksmiths or others, and keys to Ace locks are stamped "Do
Not Duplicate."

If the owner of an Ace lock loses his key, he may obtain a duplicate from
the Company. Alternatively, he may have a proficient locksmith "pick"
the lock, decipher the tumbler configuration, and grind a duplicate tubular
key. The latter procedure is quicker than the former, though more
costly. The locksmith will, to avoid the need to "pick" the lock each
time a key is lost, record the key code (i.e., the tumbler configuration)
along with the serial number of the customer's lock. Enough duplicate
keys have been made by locksmiths that substantial key code data have been
compiled, albeit noncommercially and on an ad hoc basis.

Appellant Victor Fanberg, the son of locksmith Morris Fanberg and a locksmith
in his own right, has published a number of locksmith manuals for conventional
locks. Realizing that no compilation had been made of tubular lock
key codes, in 1975 Fanberg advertised in a locksmith journal, Locksmith
Ledger, requesting that individual locksmiths transmit to him serial number-key
code correlations in their possession in exchange for a copy of a complete
compilation when finished. A number of locksmiths complied, and in
late 1976 Fanberg and his father began to sell a two-volume publication
of tubular lock codes, including those of Ace locks, entitled "A-Advanced
Locksmith's Tubular Lock Codes." In 1976 and 1977 Fanberg advertised
the manuals in the Locksmith Ledger for $ 49.95 and indicated that it would
be supplemented as new correlations became known. About 350 manuals
had been sold at the time of trial. The District Court found that
Fanberg "had lost or surrendered control over persons who could purchase
the books," meaning that nonlocksmiths could acquire the code manuals.

The books contain correlations which would allow a person equipped with
a tubular key grinding machine to make duplicate keys for any listed Ace
lock if the serial number of the lock was known. On some models, the
serial numbers appear on the exterior of the lock face. Thus,
Fanberg's manuals would make it considerably easier [*403] (and less
expensive) for a person to obtain (legitimately or illegitimately) duplicate
keys to Ace locks without going through the Company's screening process.
This is what caused consternation to the Company and some of its customers.
At no time did Fanberg seek, or the Company grant, permission to compile
and sell the key codes. Nor did the individual locksmiths seek authorization
from the Company or their customers before transmitting their key code data
to Fanberg.

The Company filed a three-count complaint against the Fanbergs, alleging
federal question jurisdiction and diversity of citizenship, on December
2, 1976. The complaint was predicated on theories of trademark infringement
. . . federal unfair competition . . . and California common law unfair
competition under former Cal.Civ.Code § 3369. On November 17, 1977,
Judge Enright granted summary judgment for the Fanbergs on the federal claims,
but left intact the state law claim. The complaint was amended, and
a four-day bench trial was held before Judge Kerr on January 23-26, 1979.
On November 28, 1979, Judge Kerr entered judgment in favor of the
Company and filed findings of fact and conclusions of law.

The court found that the Company's high security policy for its Ace tubular
locks, of which the confidential key code data were a part, was a "valuable
business or trade secret-type asset" of the Company, and that the Fanbergs'
publication of their compilation of these codes so undermined the Company's
policy as to constitute "common law unfair competition in the form of an
unfair business practice within the meaning of Section 3369 of the Civil
Code of the State of California" . . . . The court enjoined the Fanbergs
from publishing or distributing any lists of key code correlations for the
Company's registered series Ace tubular locks.

On this appeal the Fanbergs argue that the District Court erred on three
grounds: (1) that the injunction against publication of their book constitutes
a prior restraint prohibited by the First Amendment to the United States
Constitution; (2) that the statute under which the injunction issued, former
Cal.Civ.Code § 3369, is unconstitutionally vague; and (3) that the District
Court applied erroneously the common law doctrine of trade secrets in concluding
that the Fanbergs had committed an "unfair business practice" under Section
3369.

THE TRADE SECRETS CLAIM

Appellants argue that the District Court erroneously concluded that they
are liable under Section 3369 for acquiring appellee's trade secret through
improper means. We agree, and on this basis we reverse the District
Court.

Although the District Court's Findings of Fact and Conclusions
of Law are lengthy, the thrust of its holding may be fairly summarized as
follows: appellants' acquisition of appellee's serial number-key code correlations
through improper means, and the subsequent publication thereof, constituted
an "unfair business practice" within the meaning of Section 3369. Even
though the court did not make an explicit finding that appellee's serial
number-key code correlations were protectable trade secrets, both appellants
and appellee premise their appeal on such an "implicit" finding.
We think it clear that the District Court based its decision on a theory
of improper acquisition of trade secrets, and in the following discussion
we assume arguendo that appellee's listing of serial number-key code correlations
constituted a trade secret.(2)[*404]

California courts have adopted the theory of trade secret protection
set out in the Restatement (First) of Torts, § 757, and the comments thereto,
in resolving disputes involving trade secrets. [California has since adopted
the Uniform Trade Secrets Act.] Commission of this common law tort is enjoinable
under the purview of "unfair competition" and "unlawful" or "unfair business
practice" under Section 3369.

The pertinent portion of Section 757 of the Restatement provides:

"One who discloses or uses another's trade secret, without a privilege
to do so, is liable to the other if

"(a) he discovered the secret by improper means, or

* * *

"(c) he learned the secret from a third person with notice of the facts
that it was a secret and that the third person discovered it by improper
means * * * "

Trade secrets are protected, therefore, in a manner akin to private property,
but only when they are disclosed or used through improper means. Trade
secrets do not enjoy the absolute monopoly protection afforded patented
processes, for example, and trade secrets will lose their character as
private property when the owner divulges them or when they are discovered
through proper means. "It is well recognized that a trade secret
does not offer protection against discovery by fair and honest means such
as by independent invention, accidental disclosure or by so-called reverse
engineering, that is, starting with the known product and working backward
to divine the process." Sinclair [v. Aquarius Electronics, Inc.,
42 Cal. App.3d [216,] 226, 116 Cal. Rpt. 654, 661 [(1974).]

Thus, it is the employment of improper means to procure the trade secret,
rather than mere copying or use, which is the basis of liability.
Restatement (First) of Torts, § 757, comment a (1939). The Company
concedes, as it must, that had the Fanbergs bought and examined a number
of locks on their own, their reverse engineering (or deciphering) of the
key codes and publication thereof would not have been use of "improper
means." Similarly, the Fanbergs' claimed use of computer programs
in generating a portion of the key code-serial number correlations here
at issue must also be characterized as proper reverse engineering. The
trial court found that appellants obtained the serial number-key code
correlations from a "comparatively small" number of locksmiths, who themselves
had reverse-engineered the locks of their customers. The narrow
legal issue presented here, therefore, is whether the Fanbergs' procurement
of these individual locksmiths' reverse engineering data is an "improper
means" with respect to appellee Chicago Lock Company.

The concept of "improper means," as embodied in the Restatement, and as
expressed by the Supreme Court, connotes the existence of a duty to the
trade secret owner not to disclose the secret to others. See Restatement
(First) of Torts, § 757, comment h (1939). "The protection accorded
the trade secret holder (i.e., in this case the Company) is against the
disclosure or unauthorized use of the trade secret by those to whom
the secret has been confided under the express or implied restriction
of disclosure or nonuser." Kewanee Oil Co. v. Bicron Corp.,
416 U.S. 470, 475, 94 S.Ct. 1879, 1883, 40 L.Ed.2d 315 (1974) (emphasis
added). [*405]

Thus, under Restatement § 757(c), appellants may be held liable if they
intentionally procured the locksmiths to disclose the trade secrets in
breach of the locksmiths' duty to the Company of nondisclosure. See
Restatement (First) of Torts, § 757, comment h (1939). Critical
to the District Court's holding, therefore, was its conclusion that the
individual locksmiths, from whom the Fanbergs acquired the serial number-key
code correlations, owed an implied duty to the Company not to make the
disclosures.

We find untenable the basis upon which the District
Court concluded that the individual locksmiths owe a duty of nondisclosure
to the Company. The court predicated this implied duty upon a "chain"
of duties: first, that the locksmiths are in such a fiduciary relationship
with their customers as to give rise to a duty not to disclose their customers'
key codes without permission; and second, that the lock owners are in
turn under an "implied obligation (to the Company) to maintain inviolate"
the serial number-key code correlations for their own locks[.] The
court's former conclusion is sound enough: in their fiduciary relationship
with lock owners, individual locksmiths are reposed with a confidence
and trust by their customers, of which disclosure of the customers' key
codes would certainly be a breach. This duty, however, could give
rise only to an action by "injured" lock owners against the individual
locksmiths, not by the Company against the locksmiths
or against the Fanbergs.(3)

The court's latter conclusion, that lock owners owe a duty to the Company,
is contrary to law and to the Company's own admissions. A lock purchaser's
own reverse-engineering of his own lock, and subsequent publication of
the serial number-key code correlation, is an example of the independent
invention and reverse engineering expressly allowed by trade secret doctrine.
See Sinclair, 42 Cal. App.3d at 226, 116 Cal. Rpt. at 661.(4)
Imposing an obligation of nondisclosure on lock owners here would frustrate
the intent of California courts to disallow protection to trade secrets
discovered through "fair and honest means." Further, such an implied
obligation upon the lock owners in this case would, in effect, convert
the Company's trade secret into a state-conferred monopoly akin to the
absolute protection that a federal patent affords. Such an extension
of California trade secrets law would certainly be preempted by the federal
scheme of patent regulation. See Kewanee Oil Co. v. Bicron Corp.,
416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974) . . . .

Appellants, therefore, cannot be said to have procured the individual
locksmiths to breach a duty of nondisclosure they owed to the Company,
for the locksmiths owed no such duty. The Company's serial number-key
code correlations are not subject to protection under Restatement § 757,
as adopted by the California courts, because the Company has not shown
a breach of any confidence reposed by it in the Fanbergs, the locksmiths,
or the lock purchasers-i.e., it has failed to show the use of "improper
means" by the Fanbergs required by the Restatement.

The District Court's conclusion that the Fanbergs committed an "unfair
business [*406] practice" under Section 3369, therefore, must be
reversed, and judgment should be entered in favor of appellants. In
view of the foregoing we find it unnecessary to reach appellants' First
Amendment and vagueness claims.

REVERSED AND REMANDED with instructions that judgment be entered in favor
of defendants-appellants.

2. [court's footnote 2] Both parties devote
much of their argument to whether the Company's key code data properly
constitutes a "trade secret" within the meaning of Restatement (First)
of Torts § 757, comment b (1939). Although for purposes of our
holding we may assume arguendo that the correlations do constitute a trade
secret, we think it clear that because the correlations are an unpatented
compilation of information, they constitute a "trade secret" within the
meaning of the Restatement as adopted by California courts. . . . Restatement
(First) of Torts § 757, comment b (1939).

4. [court's footnote 4] If a group of lock
owners, for their own convenience, together published a listing of their
own key codes for use by locksmiths, the owners would not have breached
any duty owed to the Company. Indeed, the Company concedes that
a lock owner's reverse engineering of his own lock is not "improper means."